Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Pre-election Utopia?

Whether motivated by political interest or economic need, this has been a year in which all the stops have been pulled to keep U.S. financial engines moving forward. And why not? As we see it, the risks of a market dislocation are greater than they ever have been before. So it comes as no surprise that central banks (excluding only the Russians) have taken extreme measures, implementing the use of “unlimited” monetizing to stave off disaster. But there are limits and tolerance thresholds to every action we take, and in the case of “QE to infinity” the natural offset will ultimately be derived from the forces of inflation. That said, we’ll be looking for indications in coming months, before and after the election, of the diminishing returns inherently found in endless quantities of any one given thing.

So far, following the Fed announcement, the markets have been hard pressed to show signs of an across-the-board breakout into bullish territory. Under Dow Theory, the Transportation Index has yet to confirm the Dow by breaking above its previous highs set in May of this year. Instead, it has struggled to keep from breaking into new lows. Small caps, usually the leaders to the upside, have also refused to attain new highs alongside the Dow or the S&P 500. And regarding these indexes, both seem bent on climbing ever higher absent any favorable increases in volume.

The September jobs report released today created quite a start for the equity market, but it morphed into an afternoon siesta on Friday. The unemployment rate fell to 7.8% from 8.1% on an increase in non-farm payrolls of 114,000. For those who don’t know, it takes an increase of more than 150,000 jobs to lower the unemployment rate. This was clearly not the case, so the Bureau of Labor Statistics (BLS) revised the previous two months’ worth of data upward by 86,000 to provide the necessary statistical movement. Of the vast majority of jobs created, more than half continue to be part-time in scope with government hiring firmer than that of the private sector.

In stark contrast earlier in the week, the September Institute for Supply Management (ISM) Non-manufacturing Index registered 55.1 vs. expectations of 52.7. Employment, however, declined to 51.1 from 53.8 and the prices-paid component increased to 68.1 from 64.3 – a seven month high. The difference between the ISM and the BLS results lends credence to the notion that BLS calculations have been “influenced” in some way for the benefit of the incumbent party – meant perhaps to offset a loss to Romney in the first of three debates.

Mario Draghi also helped push stocks higher when he added another absolute to his verbal repertoire, stating that the euro was “irreversible.” He insinuated that the ECB’s bond buying plan is ready to go – contingent of course on painful austerity measures needed from Spain. Draghi stands behind his promise to monetize, even while eurozone inflation accelerates beyond ECB targets. Eurostat reported that consumer prices in the region rose 2.7% vs. the ECB’s target of 2.0% for the 12 months ending in September – 35% faster than expected.

So it seems that central bankers are delivering on a promise they shouldn’t keep, while leaving markets to balance on a tightrope that threatens disaster on either side – inflation on the one, an intolerable debt load on the other. Stay tuned.

Best regards,

David Burgess
VP Investment Management